Commentaries

Posted November 28, 2011

In collaboration with the John D. and Catherine T. MacArthur
Foundation’s How Housing Matters
Initiative, Spotlight on Poverty and
Opportunity will be running a series of commentaries for the next two
months exploring the relationship between housing and three topics: health,
economic opportunity, and education. Please be sure to read Michael Stegman’s “An
Introductory Note” to learn more.

In 2008, over 2.2 million households containing
over five million individuals used a Housing Choice Voucher – commonly referred
to as a Section 8 voucher – to help pay the rent. With so much focus on the
budget, every program will have to prove its effectiveness, including large and
popular programs like Section 8.

As evidenced by its lengthy waiting lists and
large number of recipients, the Section 8 voucher program is widely used and provides
valuable assistance to millions of families annually. The program design,
however, has some components that appear to result in short-term declines in
recipient earnings. The good news is that slight changes to the program design have
the potential to correct this problem and possibly lead to higher incomes for
participants.

According to the Department of Housing and
Urban Development (HUD), the Section 8 voucher program is primarily designed to
enable “very low-income families, the elderly, and the disabled to afford
decent, safe, and sanitary housing in the private market.”Like most policies, however, the Section 8
voucher program has had some unintended consequences.One side effect is a reduction in earnings for
people in the years immediately after receiving the vouchers. Using detailed data
from the state of Wisconsin, my colleagues and I conducted a study comparing
the earnings of Section 8 voucher recipients to the earnings of non-recipients with
similar prior earnings histories, county of residence, demographic
characteristics, and other measures.

The results of this research indicate that, on
average, receipt of a Section 8 voucher reduces earnings by about ten percent
in the initial year of receipt. These negative effects are most pronounced in
the first year, but fade over time. After six years, there is no evidence of a
difference in the annual earnings of recipients and non-recipients. This
pattern has been confirmed by other studies of the program as well.

When looking at these data, there are several
features of the Section 8 program design that can explain this initial and
pronounced negative effect on recipient earnings.

First, the voucher program requires participants
to contribute 30 percent of their income towards rent. This provision is
intended to ensure that, to the extent possible, recipients contribute to their
housing costs. Yet it also effectively acts as a 30 percent tax on their earnings.
As any economist will tell you, taxes create a negative incentive to work.

Second, the rental subsidy provided by a
Section 8 voucher increases recipients’ incomes, which may ultimately have a
negative effect on recipient earnings. That’s because the increase in income
may result in a phenomenon that economists refer to as “the income effect,”
whereby voucher recipients choose to work fewer hours.

Third, to continue to receive a Section 8
voucher, individuals must fall below an income ceiling. Exceeding it by even a few
dollars can jeopardize receipt of a voucher worth thousands of dollars
annually. Voucher recipients are quite aware of this eligibility threshold, and
may take steps to ensure they stay below it.

Finally, Section 8 voucher recipients often
relocate when they first receive a voucher. Although this relocation may be
beneficial in the long-term, it likely disrupts social and labor market networks
in the short-term. These short-term disruptions may also help explain initial
reductions in earnings, as recipients move and take time to find new jobs.

Although our research raises concerns about the
short-term earnings effects of Section 8 vouchers, we also uncovered some
evidence in a follow-up study that may help policymakers take steps to mitigate
these negative impacts.

In this second study, we conducted an analysis
in which we compared the earnings of voucher recipients to the earnings of
public housing residents in Milwaukee, the majority of whom reside in Hope VI
projects, a HUD program to “eradicate severely distressed public housing.”

Hope VI residents are subject to many of the
same program design features as voucher recipients—they must contribute 30
percent of their income towards rent and then the Hope VI program pays the remainder of the rent due. Milwaukee Hope VI
residents must also, however, sign a lease addendum that requires them to
either be employed or actively taking steps to become employed.

When we compared the earnings of these two
groups, we found that the residents of public housing – the majority living in
Hope VI projects – earned about ten percent more than voucher recipients in the
first year of receiving housing assistance. Because both groups are subject to similar
program design features, this suggests that requiring residents to sign a lease
addendum stipulating that they will be employed or looking for employment has
the potential to mitigate the negative effect of voucher receipt on earnings.

Based on these results, policymakers should consider
adjusting aspects of the Section 8 program to continue to help individuals
secure safe, sanitary, and affordable housing without creating incentives for
short-term reductions in earnings.

Deven Carlson is a Ph.D. candidate in the Department of Political
Science at the University of Wisconsin-Madison, a graduate research fellow for
the Wisconsin Center for Education Research, and a graduate assistant for the
Institute for Research on Poverty.